I am very fortunate to work with wonderful affiliates in the Real Estate world. Recently I had lunch with Steven Depperschmidt from Fairway Lending and was able to get his take on what lenders look for when clients would like to buy a home.
The minimum guidelines that all lenders must follow are set by Freddie Mac and Frannie Mae, however, once those guidelines are met then lenders can adjust there qualification requirements.
There are 3 Basic Items a Lender must look at before an individual can qualify for a Home Mortgage.
The Credit Score: Credit scores can range from the low 500’s to the 800’s, the minimum score accepted for a loan can be as low as 580. However, the higher the Credit Score…the better loan one will receive…meaning interest rates and closing cost will be lower depending on the Credit Score…for every 20pts of improvement in a credit score borrowers will have a significant benefit for a better loan.
The sooner a buyer gets in touch with a lender is helpful, many buyers can address certain items in their credit report and increase their score so that they are able to get a better loan. This can take time so the sooner one talks with a lender the better!
Debt to Income Ratio: To qualify for a home mortgage one can only have so much of their total income going to debts. This includes car payments, credit cards, and your home mortgage amount. It can also include other items that one is required to pay such as Child Support… For the qualifying process the amount of total monthly debt can not exceed 50% of ones gross income. There are some loans out their that would like the Debt to Income Ratio be capped at around 45% of ones gross income.
The mortgage payment will include the Principle, Interest, Taxes, and HOA fees. When qualifying for a loan it is very important to know what the max payment is that one can qualify for not the max price since Taxes and HOA dues are specific to each property.
Make sure to ask your lender for your max payment not max purchase price.
Here is a simple formula for one to use on their own to calculate the maximum payment
Gross Income X 50% – Payments.
Down Payment and Closing Cost: A lender needs to know what one is capable of bring to the closing table. The Down Payment and Closing cost required for the purchase of a property changes with each property and loan type. Once a lender knows what the borrower is capable of doing then the lender can help the borrower to chose the loan that works best for their situation.
There are Grant Programs available to buyers to assist with the down payment and closing cost items. Some buyers can come to the table with as little as $1000.00 down and be able to close on a home loan.
Personal Tips: If you are thinking about buying a home talk with a lender. You might be a lot closer than you thought to the possibility of being a Home Owner. Lenders are there to help you navigate this process. If for some reason you are not quite ready to purchase a home the lender will help create a plan for you to follow so you can purchase a property in the near future.